Bailout money: five actions to recalibrate the social contract
12 May 2020: ICAEW’s Public Sector team outlines five actions the government could take to ensure more equality in the rebuilding of the economy and establish an improved, ‘new normal’ in society.
The taxpayer has helped keep the economy alive by providing the funds for the government’s various support schemes during the coronavirus crisis. This support provided to businesses may fundamentally shift the relationship between business and society, and raises questions in the public mind about what this will ultimately mean for the interaction between the two.
Businesses are the lifeline of the economy
The latest estimates predict that the government deficit (net spending) is set to exceed £275bn in 2020-21, five times more than the forecast of £55bn presented in the March Budget. The huge increase in spending forecast is in direct response to COVID-19.
Providing much-needed help and support to businesses small and large is absolutely the right thing to do. Once we get back to some form of normality there has to be an economy left to ‘re-open’, so helping businesses through these times is vital. After all, businesses pay employees, taxes, and provide income for pension funds via dividends.
The UK has always been an open, agile economy that has benefited many, but not all aspects worked as well as they could. Given this, and the fact that the UK is about to leave the EU and will need to be internationally competitive to attract inward investment now is a good time to reflect on some elements of the relationship between the taxpayer, businesses and government (the social contract).
Five actions to recalibrate the social contract
Outlined below are five actions the government should take to kick-start a debate about the sort of ‘new-normal’ society would like to see. If taxpayers are to have a greater stake in the economy, then they should also have a greater say on how it should operate:
1) Learn from this experience
In the 2008/9 financial crisis, the banks were the centre of attention. One of the issues then was the risk of bank failure and the impact this would have on the economy. Popular rhetoric at the time was that banks were ‘too big to fail’, which many argued led to moral hazard – increased risk-taking in the knowledge they would be bailed out should things go horribly wrong.
Fast-forward to the present, and the government is trying to prop up every single sector, yet some sectors and entities have been more resilient than others. A review should take place analysing which sectors received what support, then examine the regulatory environment in which they operate. Some of the sectors may require bigger capital buffers, much like the requirement imposed on the banks and insurers.
2) Question the status quote on incentives, dividends and pay
Going one step further, the government should question certain elements of the market structure in which we operate and whether the status quo should be maintained:
- Are the tax incentives that lead to some companies gearing themselves up to extreme levels (debt for equity), often to pay their venture capital backers handsome dividends, right for this day and age? Investors take risks and should be rewarded, but debt-driven growth is not a long-term sustainable solution.
- Dividends are often the lifeblood for pension funds, yet there is a growing list of companies that have paid vast amounts of dividends and yet become insolvent in the periods shortly after. Dividend policies must be sustainable and should not drain a company of its ability to withstand economic downturns. Do the dividend rules under the Companies Act work?
- Low pay culture. Many people on the lowest incomes are ‘essential workers’ and frequently work for companies whose chief executives and senior personnel earn many multiples of their salaries. The current gender pay gap disclosure requirements are useful but only provide a high-level overview, without comparing salaries of those performing similar roles or taking account of salary differences by grade. Are the salary disclosures sufficient to highlight pay gaps, including by ethnicity?
3) Provide as much bailout transparency as possible
The government is unlikely to be able to disclose which companies have benefited from various bailout schemes. However, that should not prevent it from using this information internally, and in any event, we would expect to see relevant disclosures in the annual reports of listed companies.
The taxpayer can expect adequate disclosures in the government accounts regarding the guarantees on the loans (ie the banks’ expected credit losses) and more information on the loans themselves. Transparency to those ultimately funding the bailout is key.
4) Rethink tax haven policies
The government should, on behalf of the taxpayer, analyse the entities that received bailouts but are known to have operations in tax havens. Governments in France and Denmark made the bold move to deny bailout funds to any company that has a known presence in tax havens (as listed by the EU).
5) Don’t lose sight of the bigger picture
This crisis is born of a much bigger unfolding global disaster of climate emergency, massive biodiversity loss and growing inequalities The government must not lose sight of these in setting the policy agenda for recovery. Learning from what went well during the lockdown, the government should try to incentivise and support new ways of working that continue on this trend and perhaps look more favourably on entities actively promoting sustainability.
Measures taken to reverse the trajectory of the pandemic around the world are leading to heavy economic losses and evidence is already emerging that most large economies will see unprecedented falls in their economic output (GDP). A global recession is almost inevitable, and this will put further strain on government finances as unemployment rises and tax revenues fall.
It is well known that years of low interest rates have kept some companies afloat when in other times they most probably would have become insolvent. These companies have now also been propped up by the bailout measures. Not only does this increase the likelihood of bad debts but it also prevents a more effective allocation of capital to those businesses that are sustainable.
Policy implications of a change in attitudes towards business
No one looks forward to a recession, but it is an opportunity to implement bold new policies to ensure more equality in the rebuilding of the economy. Every penny counts, which is why taxpayers should demand that bailout funds must not be abused, are repaid to the extent possible and are used as intended, which is to ensure a swift return to a sustainable and maybe even an improved normal.
The support provided to businesses in this time of crisis may fundamentally shift the relationship between business and society. Consumers will question the responsibility business should bear to the public, and its onus to act in the common good. Fair dealing with customers, suppliers and employees may no longer be something a company can ignore in pursuit of profit maximisation – is the fiduciary duty of care under S172 of the Companies Act sufficient? The government should participate in this debate and consider the policy implications of a recasting of societal attitudes.
For further ICAEW insights and updates on how the COVID-19 pandemic is impacting different business and industry sectors, along with data and analysis on the UK and global economy, please see our designated hub.